FY14 results indicate margins improving despite slowing sales

Written by Devangi Gandhi | Mumbai | Updated: May 31 2014, 06:20am hrs
Following the strong mandate gained by the Narendra Modi government that has raised expectations of a slew of key reform announcements in coming months, analysts expect earnings upgrades to start getting reflected in fiscal 2015-16 estimates. However, the earnings profile in the recently concluded fiscal 2013-14 appears to be confirming a turnaround in India's macro situation given the improved profit margins of corporate India.

For a set of 62 companies from the BSE 100 universe that have reported their fiscal numbers as of Thursday, the operating and net profit margins increased by 90 basis points (bps) and 25 bps respectively, to 18.6% and 9.6%, in that order. On the back of a sharp slowdown in the economic activity, the aggregate revenues of the sample moderated further, reporting yoy growth of 10.7%, the lowest in four fiscals.

Despite this, the operating performance of the sample was supported by an impressive 319 bps decline in the yoy growth in the total expenditure as companies took efficient cost-cutting measures.

While flat yoy growth of 9.3% in raw material expenditure, including, stock adjustments and finished goods purchases, aided the operating margins, a 19% decline in promotional expenses also contributed to operational performance.

Such noble operational execution notwithstanding, net profit margin reported marginal improvement due to elevated interest costs and slowing other income growth.

In a fiscal during which benchmark interest rates were lifted from 7.25% to 8.5%, the aggregate interest outgo of the sample grew 25.7% yoy.

As India's GDP grew at its slowest in a decade, a deceleration in spending by consumers was well reflected by slower top-line at consumer goods companies. Barring smaller FMCG players like Colgate and Dabur, most FMCG companies reported a sharp fall of 600-1,200 bps in yoy revenue growth. In case of Titan, the restrictive gold import policy as well as higher domestic gold prices impacted the topline as well as earnings growth.

Due to a tougher business environment mired with coal linkage issues, slower project clearances and muted order-book growth, power producers , construction and infra companies and capital goods producers reported declining sales and profit growth. The last two quarters of the fiscal, however, did provide some respite due to recognition of compensatory historical tariffs for power companies and some revival in project permits supporting their quarterly financial performances.

While domestic auto and metal producers also felt the heat of decelerating economic activity, players with substantial overseas operations, including Tata Power, Tata Steel, and Hindalco, managed to buck the trend. Despite frequent close-down of its several manufacturing facilities due to labour issues, Maruti Suzuki benefited from a sharp depreciation in the Japanese yen (21% yoy decline in average value of the currency) due to a lower import burden.

Export-oriented IT and Pharma companies demonstrated the defensive nature of their businesses with healthy sales and earnings momentum. A more than 11% fall in the average value of the local currency also cushioned their earnings growth.